Investing in individual stocks requires a lot of homework. The study of the financial statements of companies is called fundamental analysis. In this article I will look at companies in our Game Trader coverage universe from a bottom-up perspective. Balance sheets, income statements, cash flow statements, and other disclosures are made public each quarter by companies and are readily available to prospective investors. I will be updating our stock ratings as I see fit when there are changes to a company's financial performance.

Here is a breakdown of the Game Trader stock ratings system:

• Super Mega Buy - This is similar to Goldman Sachs' Conviction Buy List. This rating is reserved for my best investment ideas.
• Buy - This rating is for companies that are still reasonably valued and have solid upside potential.
• Hold - This rating is for solid companies that may be closer to fully valued than not. They are not worth selling, and I wouldn't argue with people investing in the stock or holding on to their existing positions.
• Don't Buy - This rating is for stocks that are not worth buying, but probably aren't too overvalued to the point where investors would want to sell their position. The main distinction is that I would not recommend buying stocks with this rating versus stocks with a "Hold" rating.
• Sell -  This rating is for companies that are not reasonably valued and have material downside potential.
• Super Mega Sell - This is similar to Goldman Sachs' Conviction Sell List. This rating is reserved for my best short ideas.

It is important to have an understanding of market conditions when investing in individual stocks. Fifty percent of a stock's move on any given day can be governed by the performance of stock market indexes like the Dow Jones Industrial Average, S&P 500, and NASDAQ Composite. The S&P 500 is indexed based on the size of the company, also known as market capitalization. This means that stocks like Apple, the largest company in the world, are going to have a higher correlation to movements in the S&P 500.

It is also useful to look at an individual stock's valuation relative to the overall market. The S&P 500 has a 26.13 price to earnings (P/E) ratio. The historic mean P/E for this index is 15.66, which definitely means that the overall market is being valued more favorably than most times in history. It is with this information that you will find some pause in these stock ratings. I have very few investment ideas in the stock market that I believe are worth taking serious risks with, but that does not mean that the stock market can't go higher. 

Risks to this market in the near term are the paring back of Quantitative Easing by the Federal Reserve and uncertainty in Washington leading into the mid-term elections. The current administration ran on a platform of lowering the corporate tax from 35% to 15% in the United States, and multi-national companies with cash stored abroad have all seen their stocks rally tremendously. Congress successfully passed a bill that lowered corporate taxes, and I believe it could lead to a blow off top like we have seen in past stock market bubbles. That being said, I believe that long-term investment in a balanced portfolio of individual stocks is a great way to create wealth and investors should always be looking for diamonds in the rough.

Without further ado, here are the initial Game Trader stock ratings.

Super Mega Buy Rating

Nintendo

• Stock Symbol: NTDOY (US) 7974 (JPN)
• Earnings Release Date: 1/31/18
• Market Capitalization: $62 billion
• Dividend Yield: 1.12%
• Trailing P/E: 56.96
• Forward P/E: 68.72
• Trailing P/S: 14.10
• Forward P/S: 7.18

Nintendo Co., Ltd. Investor Relations website

I have been bullish Nintendo's stock for years. Many of my investment theses that I have written about in the past are finally coming to fruition. Nintendo has new revenue streams and a long runway ahead of them with their new efforts in mobile apps, video content, and amusement parks. They also have one of the hottest consumer electronics products to come out in recent years with the Nintendo Switch console. The stock has had a huge run, but it remains my best long-term investment idea.

The stock is not cheap based on the guidance provided by the company, but I believe we may be witnessing a bit of underpromising and overdelivering on the part of Nintendo's management. Last fiscal year's results also included the one-time benefit from the company selling their Seattle Mariners stake, making the jump in P/E ratio appear more alarming year over year. Other risks to the company's performance are foreign currency headwinds as the Yen has remained strong against the Dollar and Euro.

Nintendo appears to have finally turned a corner financially. The company has provided revenue guidance for nearly 100% year-over-year growth. The amount of untapped potential that resides in their vast portfolio of amazing characters and franchises is striking. President Kimishima clearly has no qualms with experimenting in new mediums with their IP and I believe that openness will be a welcome change for shareholders for years to come. Investors now have to pay a premium for Nintendo's growth compared to a year ago when the stock was trading at severly depressed valuations.

Buy Ratings

Apple

• Stock Symbol: AAPL
• Earnings Release Date: 2/1/18
• Market Capitalization: $909 billion
• Dividend Yield: 1.42%
• Trailing P/E: 19.27
• Forward P/E: 15.4
• Trailing P/S: 3.97
• Forward P/S: 3.32

Apple Inc. Investor Relations website

Apple Inc. has been a great long-term investment for patient shareholders over the last two decades. It is now the largest company in the world with a market capitalization rapidly approaching $1 trillion. The company boasts a massive amount of users in their ecosystem and continues to profit off of their flagship iPhone product line.

The stock trades at a discount to the S&P 500, which is odd considering most brands of Apple’s stature are given a premium. I have written previously about how the company has gone from carrying a Steve Jobs premium to a Tim Cook discount. It is undeniable that the company misses their charismatic founder, but Apple Inc. has operated extremely well financially since Mr. Jobs passed away in 2011. 

It seems inevitable that Apple’s stock will be the first to reach the coveted $1 trillion market capitalization. The S&P 500 currently trades at a 26.5 P/E ratio. If the market were to give Apple the same multiple, it would be trading above $240/share. This would put it well above the mythical $1 trillion market capitalization discussed above.

Many folks argue that Apple is bumping its head against the law of large numbers and that is most apparent in its slowing year-over-year revenue growth. At some point, Apple’s margins will decline and their share buybacks will not be able to manufacture earnings per share growth to the liking of Wall Street. I don’t believe we have seen Apple Inc. reach this moment just yet, but we are certainly closer to the event horizon than ever before.

Apple is "Buy" rated at Game Trader, but I will be keeping a close eye on its margins and revenue growth going forward. 

GameStop

• Stock Symbol: GME
• Earnings Release Date: 3/26/18
• Market Capitalization: $1.76 billion
• Dividend Yield: 8.74%
• Trailing P/E: 4.61
• Forward P/E: 5.34
• Trailing P/S: 0.20
• Forward P/S: 0.20

GameStop Corp. Investor Relations website

That’s right. I think GameStop is a buy. At this point the company is priced like a long-dated call option. This is a speculative buy recommendation and I am not blind to the headwinds the company faces. Used game sales are collapsing as developers and platforms have shifted to online distribution of their games, and traditional retailers are under assault by Amazon. Everything looks terrible for GameStop, and the contrarian in me is intrigued. The stock is heavily shorted with over 35% of its available shares being borrowed and sold as a bet against the company.

Why on Earth would I buy GameStop? As I mentioned above, I tend to be a contrarian investor, but I use fundamental analysis to guide my judgement. GameStop is down over 50% in the last two years and is now trading at a discount to its book value. This means that shareholders would actually make money if the company were to liquidate all its assets, pay off all their debt, and distribute what was left. This depressed valuation implies that the market believes GameStop will lose money in the future and start to chip away at its current book value. What doesn’t add up is that the company is still profitable. 

This will end one of two ways. Either GameStop will go bankrupt, as the majority of people believe, or the company will pivot in a manner that saves the company. The acquisition of ThinkGeek a few years ago was panned at the time, but I believe it will prove to be quite a good deal. Gamers and their parents will always need a place to try out and talk about games, which certainly can’t be done on Amazon. Either GameStop will be the last video game store in the mall, or it will go the way of Blockbuster Video. Either way, the company is not running at a loss and pays a 8.74% dividend that yields higher than the average junk bond. The dividend is actually relatively safe too as the company only pays out 45% of earnings. While I never recommend investing in a company in the hopes of an acquisition, it is certainly possible that a larger retailer would scoop up GameStop. Their $1.76 billion market capitalization is chump change for many larger companies. 

Hold Ratings 

Activision Blizzard

• Stock Symbol: ATVI
• Earnings Release Date: 2/8/18
• Market Capitalization: $53.9 billion
• Dividend Yield: 0.42%
• Trailing P/E: 32.52
• Forward P/E: 31.8
• Trailing P/S: 8.17
• Forward P/S: 7.7

Activision Blizzard, Inc. Investor Relations website

Activision Blizzard is a great company with a lot of fantastic franchises. The problem I have with its valuation is that a lot of their future growth prospects are likely priced in. Activision is expected to show slowing year-over-year earnings growth yet it trades at a premium to the overall market. This is likely going to be a bump in the road as the stock will likely regain its footing in fiscal 2018. The potential for earnings to disappoint Wall Street is very high, but patient investors can hold on to their positions. The company pays a small dividend, and it certainly has the cash and earnings power to increase that payout over the next few years. They are home to some extremely strong gaming brands like Destiny 2, Call of Duty and Overwatch. That kind of portfolio of games deserves a premium, but it remains to be seen how they will manage expectations of earnings growth going forward. Some analysts are concerned that Destiny 2 will underperform Wall Street expectations.

EA

• Stock Symbol: EA
• Earnings Release Date: 1/30/18
• Market Capitalization: $36.3 billion
• Dividend Yield: N/A
• Trailing P/E: 29.94
• Forward P/E: 27.87
• Trailing P/S: 7.4
• Forward P/S: 7.1

Electronic Arts Inc. Investor Relations website

EA had a number of fumbles last year. Star Wars Battlefront 2 and its loot crates were met with a chorus of boos and Mass Effect: Andromeda also failed to meet expectations. They also shut down Visceral Games, the studio working on Amy Hennig's Star Wars project. The company coasted by on strong FIFA and Madden sales, but it is hard to endorse a company with so many missed opportunities in the past year. It is not cheap, and I believe it has priced in the improving profit margins from the past few years at its current valuation. I was very close to rating this stock "Don't Buy," but I will wait until I see further evidence of my concerns before acting on that urge.

Facebook

• Stock Symbol: FB
• Earnings Release Date: 1/31/18
• Market Capitalization: $442.1 billion
• Dividend Yield: N/A
• Trailing P/E: 44.76
• Forward P/E: 32.09
• Trailing P/S: 16.02
• Forward P/S: 11.00

Facebook, Inc. Investor Relations website

Facebook is an advertising company. They fall into our coverage universe because of their investment in Oculus, but in reality they sell ads not VR HMDs. The story here is sales. Facebook is the only company to really provide any competition to Google in the display ad landscape. They are coming after them from a lot of angles. I personally don't think the valuation offers much upside here, but as long as the sales keep growing the share price will follow. Their sales growth has been staggering, and eventually they will have to grow into their gargantuan market capitalization.

Google

• Stock Symbol: GOOGL
• Earnings Release Date: 2/1/18
• Market Capitalization: $751.1 billion
• Dividend Yield: N/A
• Trailing P/E: 34.25
• Forward P/E: 36.38
• Trailing P/S: 8.32
• Forward P/S: 6.83

Alphabet Inc. Investor Relations website

Google is also an advertising company. They fall into our coverage universe mainly due to their experiments in and around VR and gaming. Last year they acquired OwlChemy Labs, creators of Job Simulator, and have also created Tiltbrush for VR enthusiasts, but the money is coming from display ads. They are one of the best companies in the tech sector, and it is hard to find a better company to own for the next decade. Between their AI efforts, their smart home products, and the Google Pixel line of phones, the company is definitely trying to carve out a bigger piece of the technology pie. Great company, but the valuation is a bit rich for my tastes. Google has had a huge run up since the stock market bottom of 2009 and growing pains are likely as the stock approaches a $1 trillion market cap. This stock is definitely one to add to your shopping list in case a market correction does occur, but it is hard to describe it as cheap at current valuations.

NVIDIA

• Stock Symbol: NVDA
• Earnings Release Date: 2/7/18
• Market Capitalization: $141.6 billion
• Dividend Yield: 0.26%
• Trailing P/E: 92.96
• Forward P/E: 56.75
• Trailing P/S: 20.52
• Forward P/S: 14.9

NVIDIA Corporation Investor Relations website

NVIDIA is by far the best company in the semiconductor space. Granted, their primary business is in GPUs. NVIDIA has made the GPU the most expensive and important component inside of PC gaming rigs. It is also driving the cryptocurrency mining craze. NVIDIA is spending wisely too. Investments in AR, AI, Machine Learning and Autonomous Vehicles will definitely set up the company for years to come. They are best-of-breed and deserving of their premium. It seems like it is only a matter of time for them to surpass Intel in market cap. I was close to rating this stock a buy, but the valuation is awfully high. This would be another stock that would be ripe for picking up if the market ever does come down, but its extremely high P/E ratio will lead to some very volatile trading in the years ahead.

Don't Buy Ratings

Amazon

• Stock Symbol: AMZN
• Earnings Release Date: 2/1/18
• Market Capitalization: $639.6 billion
• Dividend Yield: N/A
• Trailing P/E: 278.07
• Forward P/E: 315.40
• Trailing P/S: 4.70
• Forward P/S: 3.61

Amazon.com, Inc. Investor Relations website

This is the most expensive company on a P/E basis that is in our Game Trader coverage universe. Amazon is a video game retailer and has been increasing their footprint in the gaming space for years. The story of Amazon has been always been about sales almost at the expense of earnings. The company has disrupted brick-and-mortar retail with their business model, and they are one of the best indicators of consumer confidence. It is hard to argue against their strategy, but any company with a triple digit P/E ratio is susceptible to volatile swings when financial news breaks. I can't endorse buying the company at these lofty valuations, but it is amazing to see how far they have come in the past decade. Any misses on earnings or revenue numbers will be met with huge declines in the stock. The risk to owning the stock is too high, in my opinion.

AMD

• Stock Symbol: AMD
• Earnings Release Date: 1/30/18
• Market Capitalization: $12.2 billion
• Dividend Yield: N/A
• Trailing P/E: N/A
• Forward P/E: 99.46
• Trailing P/S: 2.84
• Forward P/S: 2.30

Advanced Micro Devices, Inc. Investor Relations website

AMD is still alive. They are in such rough shape that they have partnered with their former rival Intel to take on NVIDIA. The only upside to owning this stock is if they get acquired, but it is not cheap. This is a speculative stock at best, and it trades at a premium to the much better run NVIDIA. I wouldn't buy this stock at current valuations, and neither should you. At least they are expected to turn a profit in the current fiscal year, which is a start. I guess.

Microsoft

• Stock Symbol: MSFT
• Earnings Release Date: 1/31/18
• Market Capitalization: $706.7 billion
• Dividend Yield: 1.83%
• Trailing P/E: 27.93
• Forward P/E: 27.03
• Trailing P/S: 7.32
• Forward P/S: 6.66

Microsoft Corporation Investor Relations website

The King of Squandered Opportunities, Mister Softy. Microsoft should dominate PC gaming. They have a chokehold on the PC operating system market and a gaming brand in Xbox that can easily be leveraged on the Windows platform. The company missed the boat on the smartphone revolution and they are fighting a two front war in the console space against Nintendo and Sony. It isn't all bad for Microsoft as the stock has had a great run off of the stock market lows of 2009 powered by their efforts in cloud computing. CEO Satya Nadella deserves praise for the stock's performance during his tenure, but Microsoft is likely to run into tough year-over-year numbers sooner than later. It would be best to avoid the stock, in my opinion. It trades at a premium to Apple, which is pretty crazy when you think about it.

Sony

• Stock Symbol: SNE (US) 6758 (JPN)
• Earnings Release Date: 2/1/18
• Market Capitalization: $64.3 billion
• Dividend Yield: 0.40%
• Trailing P/E: 27.86
• Forward P/E: 18.29
• Trailing P/S: 0.95
• Forward P/S: 0.82

Sony Corporation Investor Relations website

Sony is back on top of the gaming world with the most units shipped this console generation. PS4 and PSVR are leading their respective categories, but Sony is much more than a gaming company. There are countless divisions that don't exactly play nice with each other. For instance, Sony Music has an indie game label called Unties that develops games for rival consoles. The Company's segments include Mobile Communications, Game & Network Services, Imaging Products & Solutions, Home Entertainment & Sound, Devices, Pictures, Music, Financial Services and All Other. If Sony were to spin off their gaming and camera divisions into a consumer electronics company, I would be more interested in investing. The current conglomerate has too many moving parts to be compelling at its current valuation, but Sony is definitely in much better shape than it was just a few years ago. I would avoid it for now, but things are certainly looking up.

Take-Two Interactive

• Stock Symbol: TTWO
• Earnings Release Date: 2/7/18
• Market Capitalization: $13.5 billion
• Dividend Yield: N/A
• Trailing P/E: 45.1
• Forward P/E: 38.17
• Trailing P/S: 7.10
• Forward P/S: 6.75

Take-Two Interactive Software, Inc. Investor Relations website

Take-Two Interactive has been the beneficiary of GTA Online's massive success. The revenue from that game has propelled the stock to all-time highs and shareholders are eagerly anticipating the launch of Red Dead Redemption 2. I worry that many of these expectations are baked into the stock's extremely high valuation and that the RDR2 launch may be a "sell the news" event. The company is not expected to grow revenues by very much year-over-year and with a high P/E of 45.1, any hiccup in earnings could lead to a very volatile year for the stock. The stock is up 1566% from the lows of 2009 and it might be a good time to take profits if you were lucky enough to be along for the ride. I cannot recommend the stock at its current valuation and would caution anyone who is long.

Sell Ratings

Intel

• Stock Symbol: INTC
• Earnings Release Date: 1/25/18
• Market Capitalization: $214.1 billion
• Dividend Yield: 2.38%
• Trailing P/E: 16.93
• Forward P/E: 14.17
• Trailing P/S: 3.60
• Forward P/S: 3.45

Intel Corporation Investor Relations website

Intel is another company that missed the smartphone revolution. They stubbornly stuck to their Atom chip architecture at a time when everyone was running to ARM-powered SOCs. The company is in a commodity business but has insanely high margins at the same time. Gross margins above 60% are not sustainable and it is only a matter of time before the semiconductor cycle turns on them. Intel justly trades at a discount to the market as their revenue growth slows to a snail's pace. It is only a matter of time for the company to report disappointing earnings, revenues, or margins that could potentially clobber the stock. The company recently announced a massive security flaw in their chips that will probably affect operations in the near term. Don't buy Intel. AMD or NVIDIA are better bets in the chip space. Intel is no longer the best-in-class in the semiconductor sector, and investors should steer clear. The stock could be a potential short sell candidate if the fundamental story breaks down in the near term. 

Zynga

• Stock Symbol: ZNGA
• Earnings Release Date: 2/7/18
• Market Capitalization: $2.9 billion
• Dividend Yield: N/A
• Trailing P/E: 124
• Forward P/E: 37.2
• Trailing P/S: 3.84
• Forward P/S: 3.44

Zynga Inc. Investor Relations website

Their time may have passed them by. The stock is down over 80% from its all-time high, and it doesn't appear to have any catalysts to move to the upside. Mobile gaming is not the hot place to be in anymore and Zynga has done a terrible job of managing properties. They have a history of acquiring games and running them into the ground. The stock is expensive, the margins are poor and there is little-to-no hope in sight. Don't let the low share price fool you into thinking this stock is cheap. It has been barely profitable for the past few years and there is material downside if they are unable to meet these very low Wall Street expectations.

Full Disclosure:

At the time of this article, Asif A. Khan, his family members, and his company Virtue LLC had the following positions:

Long Apple via AAPL shares and options

Long GameStop via GME shares 

Long Nintendo via NTDOY shares

Glossary

Market Capitalization - the total dollar value of a company's outstanding shares based on market prices. 

Dividend Yield - the annual dividends paid per share annually divided by the price per share of a given stock.

P/E Ratio - price-earnings ratio (P/E ratio) is the ratio for valuing a company that measures its current share price relative to its per-share earnings. The price-earnings ratio is also sometimes known as the price multiple or the earnings multiple. 

The P/E ratio can be calculated as:

Market Value per Share / Earnings per Share

P/S Ratio - price-to-sales ratio is a valuation ratio that compares a company’s stock price to its revenues. The price-to-sales ratio is an indicator of the value placed on each dollar of a company’s sales or revenues. It can be calculated either by dividing the company’s market capitalization by its total sales over a 12-month period.

Abbreviated as the P/S ratio or PSR, the price-to-sales ratio is also known as a “sales multiple” or “revenue multiple.”

Trailing - numbers based on actual earnings and sales results reported by companies.

Forward - numbers based on forward-looking estimates provided by analysts and/or companies.

Price-to-Book Value - (P/B Ratio) is a ratio used to compare a stock's market value to its book value. It is calculated by dividing the current closing price of the stock by the latest quarter's book value per share.

Also known as the "price-equity ratio".

Calculated as:

P/B Ratio = Market Price per Share / Book Value per Share

where Book Value per Share =  (Total Assets - Total Liabilities) / Number of shares outstanding

Earnings per Share - the portion of a company's profit allocated to each outstanding share of common stock. Earnings per share (EPS) serves as an indicator of a company's profitability.

EPS is calculated as:

EPS = (Net Income - Dividends on Preferred Stock) / Average Outstanding Shares

Long - to own a stock or have a position betting on it going up.

Short - to borrow a stock and sell it in order to express a negative position in it, essentially a bet that the stock will go down.

Please consult Investopedia for more useful definitions of financial terms.

Investors should do their own research or consult their advisor before acting on this information. This is an educational article and investors should consider each recommendation based on their own risk tolerance and suitability.

Asif Khan

CEO/EIC/EIEIO

Asif Khan is the CEO, EIC, and majority shareholder of Shacknews. He began his career in video game journalism as a freelancer in 2001 for Tendobox.com. Asif is a CPA and was formerly an investment adviser representative. After much success in his own personal investments, he retired from his day job in financial services and is currently focused on new private investments. His favorite PC game of all time is Duke Nukem 3D, and he is an unapologetic fan of most things Nintendo. Asif first frequented the Shack when it was sCary's Shugashack to find all things Quake. When he is not immersed in investments or gaming he is a purveyor of fine electronic music. Asif also has an irrational love of Cleveland sports.